13. (2.0 pts)) According to the Mundell–Fleming model for a small open economy w

Question

13.

(2.0 pts)) According to the Mundell–Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

            Answer:

14.

(2.0 pts) Explain why in the Mundell–Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports.

Answer:

13.

(2.0 pts)) According to the Mundell–Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

Explanation / Answer

Ans: to question 13.

If the FED cannot change interest rates, it can increase the money supply in the economy. Through this action, the the LM curve shifts outwards and there will result a fall in domestic interest rates vis-a-vis the international interest rates. A decresase in money supply produces the exact opposite effect. Even if other forms of ristricts are place on trade, NET exports are likely to go up in a fixed excahnge rate system.

Ans to Question 14:

A import ristriction imposed by the central bank in a fixed exchange rate system works like a depreciation of the appreciation of the Domestic currency. This means that for the buyer of goods from this copuntry, the prices appear to have fallen. Therefore it prompts himto buy more from that country. Thus it can be argued that import ristrictions stimulate exports.

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